Tax Return falsification scam

[Don Konipol]

So I just came across this fraud.  Had a loan applicant who owned a motel.  Received loan package including last years tax return.  Asked for the 2 prior years tax returns, was like pulling teeth.  When I finally got them they bore no resemblance income wise, or expense wise to last years return; prior years income was MUCH less and expenses MUCH higher.  When I asked for explanation, first I was told that they had improved property significantly.  When I asked for proof of funds spent for improvements, the borrower;s "partner" contacted me, and asked for the opportunity to explain.  I said sure, go ahead.  He proceeded to tell me "confidentially" that when they realized they had to refinance, they decided to report the true income and expenses and bite the tax bullet, so as to be able to prepare a tax return acceptable to a lender.  I asked why I should believe that was any more likely than the opposite scenario; that they decided to submit a falsified tax return with higher income in order to fraudulently entice a lender to make a loan.  He had no response.

I was able to verify through an industry source, with knowledge of this property, that they did indeed file a return for tax year 2014 with much higher income figures than what was actually achieved.  Later in the year, and before submitting any additional taxes, they filed an amended return with I assume the correct amount of income.  So filing this tax return with bogus income did not even cost them any additional taxes!

Used to be we could look toward the tax returns for a more "honest" income statement.  Not any more.  Now we must have three years (or more) returns, and make sure no amended returns were filed.

Your comments or similar experiences would be appreciated.

[Brandon Hall]

@Don Konipol this happens more often than you may think, though not usually to this scale. Business owners tend to underreport expenses or overstate income if they are going up for financing. Of course this is fraud and any party partaking in the process should be brought up on charges.

Honestly, if I were a lender, I'd have an ethical CPA on call whom can review tax docs and comment on how adequate they are. Fraud examination is a specialty, but all of us have received low level training and know what to look for. It sounds like you did a good job investigating though, so kudos to you.

They will continue to do these things, and one day, it will catch up to them and they'll bust. The issue as I see it is that there are many people like them. When all these people bust, they take the lenders down with them, which trickles down to other people in the cycle. Not good.

I'm sure you're not out to ruin anyone's career, but I'd seriously consider reporting these guys. Perhaps @Matthew Kreitzer can provide, at a high level, options available to you. Just because you caught them doesn't mean other lenders will have your investigative eye. We need to protect the industry!